Cash flow IS king, it is the lifeblood of any small business, it represents the amount of money moving in and out of a business and is crucial for daily operations, from purchasing materials and equipment to paying staff and managing overheads.
In the construction and transport sectors, where projects can be large-scale and timelines extended, managing cash flow effectively is vital. These industries often face unique financial challenges such as fluctuating project costs, seasonal variations in demand, and extended payment terms. A healthy cash flow ensures that a business can, not only survive but also invest in growth opportunities, like acquiring new equipment or expanding services.
We are going to show businesses who always pay cash for their equipment, that their money is better invested in appreciating assets which will result in a higher return on income. Below are two examples, example 1 is paying cash for a $400,000 prime mover. Example 2 is financing the $400,000 prime mover and using c.$400,000 cash to purchase a commercial property.
Gross Return is based on the prime mover earning the same amount per year as the purchase price, asset turner over $ for $. ($400,000 per year x 5 years).
Gross Return for commercial property is based on a 6.5% yield (Industry Standard)
Based on the above examples, example 1 owns an asset that earns c.$400,000 per year in gross income. Example 2 owns 2 assets that are earning c.$662,700 per year in combined gross income. The lesson here, increase your return on investment by using bank lending for depreciating assets and your cash for appreciating assets to increase income. In next month’s edition, we will discuss the net return of the above investments. We told you cash flow is king!
Maintaining a robust cash flow can provide a significant edge. It enables businesses to navigate the unpredictable nature of the market, meet their financial obligations on time, and build a strong reputation with suppliers and clients.
Next, we are going to show you the potential profit to your business from the above examples:
Based on the above example, if you paid cash for your prime mover, at the end of 5 years you would only have an asset worth c.$120,000 (30%, industry standard) and a net return after tax (NRAT) of $450,000, totalling $570,000. Being smart with your cash and investing in appreciating assets while funding deprecating assets, you will have the above $570,000 plus a commercial property worth c.$644,204 (10% increase PA, industry standard) and the NRAT of $975,500, all totalling c.$2,189,704 (Assets & Profit). So, next time you think about paying cash! Ask yourself, how much will this prime mover really cost me and my business?!
Do you want to know more about comparing bank lending to cash? If you want help getting prepared when purchasing equipment or If you would like to know more about setting a plan or obtaining a pre-approval (https://chevronfinance.com/apply-now/) for an upcoming purchase, please contact either your Accountant or Equipment Finance Expert today!
Chevron Finance proudly supports those across Brisbane, Melbourne, Sydney, Perth and wider Australia with reliable machinery finance solutions, founded on flexibility and transparency. With over 20 years of experience in the field, we are backed by the expertise and insights that allow us to provide best-in-class, tailored solutions to our valuable clients. Chevron Equipment Finance was established to provide a more personalised service to meet the needs of growing small and medium businesses that have been under-serviced by their bankers for years. We pride ourselves in acting with a sense of urgency in everything we do and our can do culture ensures service and results we can be proud of. https://chevronfinance.com/
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